Tag Archives: Money Management

Bellow are some thoughts from Simon Black and the folks at ZeroHedge. I all too well remember the dot-com bubble that burst as we entered a new decade almost a decade and a half ago. No the most exciting of times for many investors. Yet, are we pushing toward that point again today? The discussion below argues that such a situation is now brewing. I tend to see the validity in many of the observations made.

Having a good sense of history is important for investors. What we see in the market is driven by human logic and emotions. Things might not be exactly the same, but behavioral patterns can be similar. If such patterns exist, it is good to be on watch in order to avoid being caught off guard and thus losing a bunch of money.

No investor wants to be on top of the bubble when it decides to burst.

If someone mentions the Dotcom Bubble, Pets.com is easily the first thing to come to mind.

The online pet product store failed hard and it failed fast. In just 268 days, the company went from IPO to liquidation, managing to lose $300 million in the process.

Yet it had looked good to investors, at least for a while.

Pets.com spent exorbitant amounts of money on advertising; its sock-puppet mascot was the 90s equivalent of a viral phenomenon.

But while the company spent hand over fist on advertising, Pets.com’s was losing money on every sale because they priced their inventory at BELOW cost. Duh.

Pets.com went public on the NASDAQ in February 2000 (right as the bubble burst) at $11 per share.

The stock peaked at $14, valuing the company at over $300 million. Not bad for a company whose business model virtually assured they would lose money.

But reality set in just nine months later. The company’s stock fell over 99%, and management announced they would liquidate.

Now… we could criticize Pets.com management all day long for a ridiculous business model. But bear in mind, investors bought the story.

People believed that profits didn’t matter. And back then it was typical for loss-making companies to be valued at hundreds of millions of dollars.

Have things really changed since then?

Facebook bought revenueless Instagram for $1 billion in 2012. Snapchat, the revenueless sexting app, is now valued at $10 billion.

There are so many examples like this. And like 1999, no one seems to care.

Several top Silicon Valley insiders are now hoisting the red flag saying enough is enough.

Bill Gurley, one of the most successful venture capitalists in the world, told the Wall Street Journal last week that “Silicon Valley as a whole . . . is taking on an excessive amount of risk right now. Unprecedented since ’99.”

Fred Wilson of Union Square Ventures echoed this sentiment on his blog, railing against the widely accepted model that it’s acceptable for companies to be “[b]urning cash. Losing money. Emphasis on the losing.”

George Zachary of Charles River Ventures wrote, “It reminds me of 2000, when investment capital was flooding into startups and flooded a lot of marginal companies. If 2000 was a bubble factor of 10, we are at an 8 to 9 in my opinion right now.”

As with all bubbles, it all comes down to there being too much money in the system.

Capital is far too cheap, and that pushes people into making risky and foolish decisions.

When you’re guaranteed to lose money on a tax-adjusted, inflation-adjusted basis by holding your savings in a bank account, almost anything else looks like a better alternative.

Jared Flieser of Matrix Partners in Palo Alto summed it up when he told the Wall Street Journal, “You can’t afford to sit on the bench.”

In other words, money managers view NOT investing as losing, even if investing means taking huge risks.

It’s an abominable position to be in. If you do nothing, you lose. If you do anything, you take on huge risks.

This, of course, is thanks to a monetary system in which a tiny central banking elite conjures trillions of dollars out of thin air in its sole discretion.

History tells us that this party eventually stops, creating all sorts of unpleasant financial carnage. This has happened so many times before, and it would be arrogant to presume that this time is any different.

But it begs the question: what does one do? Is it worth trying to ride the bubble and try to get out before it all collapses?

Perhaps. But there are still pockets of value in the world that I would submit are more secure places to be.

In public markets, the junior mining sector has many companies that are trading for less than their tangible cash value. It is the exact antithesis of Pets.com.

In private markets, Startups in other thriving communities around the world (from New Zealand to right here in Chile) are valued at much more appropriate levels.

For yield, we’ve seen US dollar bank accounts in certain parts of the world paying upwards of 7%, and one low-risk company owned by the debt-free government of Singapore issuing bonds yielding over 5%.

There are options.

It’s like music. A lot of people think that music is dead. Where are today’s Led Zeppelin, Pink Floyd, Grateful Dead, Bob Marley, and Bob Dylan?

And based on the crap spewed out over the centralized, corporate-controlled radio, they’d be right.

But music is definitely not dead. There’s some amazing stuff out there. The corporate titans that control the system aren’t going to play any of it for you.

But it’s there. Just like the great investments. You have to look where no one else is looking. And you have to dig a little bit more to find gold.

Having healthy personal finances is a pivotal component for every family and society. The small, taken together, ultimately becomes the large. Our collective body ultimately becomes what we call our society. Whether it be for yourself or society, understanding what constitutes healthy personal finances is critical to creating and maintaining an environment in which we can economically thrive.

Three parts are needed to be in good order for a person/family’s personal finances to be considered in good health. The first component, and most important, is ones ‘emergency’ savings. The second is the ratio of spending to take home pay per month. The third concerns ongoing savings.

The importance of having some form of emergency savings on hand cannot be stressed enough. The term emergency is a loose term that applies to any savings held that are not designated for some other purpose. To exhibit health in this first area of your personal finances, it is necessary to have a minimum of six months of savings on hand.

Establishing a reserve of six months or more provides protection against a number of potential maladies that can occur. The most frequently cited is job loss. The loss of a job means for most people the loss of their regular occurring income. Since the ability to reduce expenses is not directly tied to whether you receive all, some or no income per month, savings must exist to service the expenses when your regular income is no longer present.

What we have experienced since the Great Recession is the fact that regaining employment is not often a fast transition. It may take months and involve relocation before one gets back to establishing a regular form of employment. Six months should be your minimum emergency savings set-aside.

If you’re earning above $60,000 annually, then a threshold above six months would strongly be suggested. Generally speaking, higher level jobs in organizations are fewer in number than lower level jobs. Therefore, establishing employment again as a higher earner would be more difficult, especially in a time when the economy is experiencing a contraction.

The second pillar is built upon establishing a sustainable ratio of monthly spending to monthly take home pay. The first step is to establish what your monthly expenses are. An average must be identified. With the average, certain non-frequent payments should be incorporated. Examples of ‘non-frequent’ expenses are DMV registration and insurance. These events do not occur monthly, but are regular and need to be identified.

Once you have arrived at a reasonable figure of what your monthly expenses are, then the expense can be compared to monthly take home pay. In doing the comparison, the initial goal is to establish a portion of ‘slack’. The slack that is needed between expenses and pay serves as a buffer. The buffer serves as protection against monthly spending that swings above the determined average. The minimum amount of slack needed in the establishment and maintenance of a health spending to pay ratio is 10%. If you lack control of your spending habits, then the amount of slack would need to be higher; say 20% or 30%.

The way the spending to pay ratio works is simple. In the case that you determine the average amount spent per month is $3,000 and take home pay is $3,500, then your spending to pay ratio would be .86 (divided the two dollar amounts). For every dollar you bring home per month, .86 cents is spent. The amount of slack you have per dollar is .14 cents or 14%. In a situation where ones control on spending is relatively strong, the 14% amount of slack would be a suitable buffer.

The third component is ongoing savings. Ongoing savings can be established in multiple ways. Depending on the avenue chosen, the re-evaluation of the spending to pay ratio might be necessary.

Ongoing savings will constitute something different for everyone. Retirement is often a binding theme, but people save for many other items. Someone might save for a TV, while another might save for a boat and another might save to start their own business. Even amongst the multitude of possibilities, general guidance can be established.

When a pre-defined contribution is being made out of ones paycheck for retirement purposes (401k, 403b or another tax sheltered account), then that money is not part of ones take home pay. In most cases, when payroll is run, the contribution to the tax sheltered account is diverted directly to the account and not included as part of the final paycheck. In such cases, the take home pay amount is not inflated by the inclusion of retirement funds. If this is not the case, then the amount dedicated to retirement pay needs to be deducted from the take home pay amount being used to establish the spending to pay ratio.

Other items that are being saved for (car, boat, house, business, etc.) need to be deducted from the amount of take home pay per month. The savings in such an instance is a savings to serve a future expense. The savings is not to serve as protection against an unknown event, retirement, or what would be considered ‘slack’ in the amount you spent this month versus what you brought home.

An example of the principal above would be a situation where you were saving $300 per month for a new television. If we go back to our example of having $3,000 in expenses per month and $3,500 of take home pay, we would need to deduct the $300 from our $3,500 take home pay. In this instance the $3,500 would fall to $3,200 and our spend to pay ratio would become .94. A ratio of .94 means our ‘slack’ would be .06 or 6%, which puts us below the 10% threshold.

Savings is paramount to establishing and maintaining a healthy personal finance system. Each of the three components outline above is structured via the establishment of savings. This is done to preserve the quality of life we’ve come to know and ensure the financial goals we’ve set forth are realized. Without being aware of our personal finances and establishing controls we are feathers in the wind hoping that fate blows us in the right direction.

For the good of yourself, your family and society, don’t reduce yourself to a feather in the wind.

There’s a good chance you’re throwing away hundreds or even thousands of dollars’ worth of food each year before it has gone bad if you’re using sell-by and expiration dates as gauges for whether food is still edible. These dates are just manufacturers’ best guess of when food is at peak quality and are not related to safety, according to Emily M. Broad Leib, director of the Harvard Law School Food Law and Policy Clinic. Because of confusion over food date labeling, a family of four spends between $1,365 and $2,275 per year, on average, on food that is wasted.

Consumers can usually expect food to be safe for another five to seven days past the sell-by date printed on the package. The best test to tell if something is still good is to smell it or take a small bite. To learn more, see Confusing Packages Lead to Wasted Food, Money.

The US Department of Agriculture (USDA) estimates the cost of raising a child in today’s environment averages around $250,00. Yes, that’s the cost per one child. Depending on the region of the country you live in, the average can range from over $280,000 to under $200,000. If we look at the cost categories where do the expenses exist and where can you find savings?

Housing – 30%

Food – 16%

Transportation – 14%

Clothing – 6%

Healthcare – 8%

Childcare & education – 18%

Miscellaneous – 8%

The interesting part of the breakdown starts with housing costs. What the USDA is doing in their analysis is attempting to compartmentalize the idea of housing. By compartmentalizing per person, then a dollar value based on average mortgage costs can be associated per child. This is a reasonable way to estimate housing costs, but is it actually applicable to your living situation?

The assumption the USDA is making for housing is that your need for housing expands as you having more kids. This a logical assumption. What might cause you to consider the logic flawed for your situation is the fact that you may not have a mortgage to pay at the time of having a child or the fact that your given housing size would not increase or decrease with or without kids. Therefore, in many situations you could consider the housing cost a sunk cost that would have been incurred at the same level with or without kids.

The housing category does deserve special attention in you personal analysis of the USDA’s estimates. At 30% it comprises nearly 1/3rd of the estimated cost. Based on the $250,000 average, elimination of 30% of the cost means a reduction of $75,000.

The childcare area is another category that could have some significant variances. If you have a relative available to watch your child/children or have one parent able to stay at home, the childcare cost is going to be greatly reduced. In terms of education, private school versus public school for K-12 education will create a huge variance, as well.

It should be noted that the analysis the USDA did excluded college expenses, since the age range is from age 0 – 18 years.

In terms of personal finance, it’s important to understand when very general studies and statistics are provided, you must find where you fit into the mix. Often times news stories are written to capture your attention, which large figures are thrown around, such as $250,000. It’s not until you deconstruct the information that you’re able to see how you might not be “average” or the assumptions made in the model doesn’t fit into how you’ve structured your finances.

Earlier this week the sad news broke of actor Robin William’s suicide. Since the announcement of his death, various information has been released to explain what might have caused his depression to spiral out of control. What is very apparent to me when reading these stories is the personal finance subtext that is woven into many of the explanations to his depressed state.

Mr. William’s, at the end of his life, had become wholly enslaved by consumption. So enslaved that he came to the point where the only hope he saw was to exit this life through suicide. This is an extreme example of one losing control of their finances through their own will. As with examples, it’s often the extreme ones that are able to drive the moral home.

It seems impossible that an A-list actor and successful comedian could arrive at the point of bankruptcy by the age of 63. This is what Mr. Williams was facing. Why? It was not for the lack of money earned. He had a very successful acting and comedy career, which put him higher than 98%-99% of the entire population in terms of lifetime earnings. His issue came from his inability to control his spending habits.

As a result of out of control spending, he found himself in a dubious situation. His need for money led him to return to roles that apparently did not help his mental state. It is reported that he was in the process of forcing himself to take the lead role in the sequel of Mrs. Doubtfire. This role is reported to be one that he dreaded having to take because it would have a negative impact on his mental condition. Yet, it would help him stave off bankruptcy.

At the end of Mr. William’s life, he had enslaved himself to his master. His master was consumption and he found that the funds used to fuel consumption did not answer to him; they owned him. This led to the escalation of his depressed state and it arrived at a point of inflection where he could not continue life and chose to end it.

What is living? Is it consuming to the point where debtors bring you to the knees of bankruptcy? Is it having more and more stuff? For Mr. Williams the laughs and jokes were not enough and whatever was missing in his life was ultimately not filled by his consumption. In the end, the consumption didn’t close the chasm, but tore it wide open.

I’m currently working on a soon to be released book titled, Enslaved by Consumption. Look for its release toward the end of 2014.

It’s estimated that over 38 million American households have no liquid cash set aside for an unexpected financial calamity (That means about 1 in 3 fall into this category…38 / 115 million total households = 33%). Of this 38 million, 25 million of them cannot be classified as poor. This is a disparaging thought that 25 million households are choosing to live hand-to-mouth (Hand-to-mouth = Spending all your earnings and not saving.). This choice not only has personal ramifications, but national, as well.

The reason choosing to live hand-to-mouth is such a disparaging thought is the same reason acrobats are heavily discouraged from performing stunts without a safety net. If your stunt goes awry and a net is there, you have an accident. If something goes wrong and you have no net, a tragedy occurs. As we experienced in the last recession, economic calamity can strike fast and hard. If you do not have savings to fall back on, you can find your household in a rather compromised situation. This situation is likely to impact not only your household, but your family and the entire society, if you must turn to some form of government assistance to recover.

When statistics are thrown out alerting the rest of society that a good portion (33%) of households are performing their personal finance routine without a net, not many solutions are provided to cure the problem. One reason stems from the fact that financial choices are not really ‘surface’ decisions. By ‘surface’ I mean that the decisions are not often lightly held beliefs. The way we spend and save our money is often the outworking of a deeply entrenched pattern of behavior that governs our lives.

For example cars, homes, clothing, technology and other tangible goods are purchased not simply for their functional value; they are purchased in part for the status they bring. For example, such purchases go beyond a decision to secure shelter with adequate space in a safe area. These decisions are made to establish a perception in one’s mind and the mind of others. This isn’t to deride such motivations. The issue becomes a problem when the superficiality suffocates practicality. In such cases, the safety net becomes a thing of scorn because it takes away from the splendor of materialism.

The wager made not to save causes society the same problem created when families forgo purchasing health insurance. Without health insurance the cost you might incur from an injury has not been hedged. No ‘net’ via insurance has been purchased to shield society from the burden of your health costs you cannot afford. A parallel situation exists when saving is foregone. Economic calamity strikes and society is left holding the bag. Food, housing and other subsidies are given to assuage the fiscal pain, while the bill is shouldered on the backs of others.

The reality is that we live in a consumer-centric society. Most outlets of influence whether it’s from the government, mainstream news, or entertainment push the idea that purchasing is one of the greatest goods. “You’re helping the economy when you…”, “You’re supporting a worker each time you…”, “The top ten fashion trends for fall are…”…The list is endless. The one message that holds true is that consumption is a virtue. The other side of the coin, saving, is like the dark side of the moon; hardly seen, sometimes spoken of, and far less glamorous.

To cure the ill that has fallen some 38 million families in the U.S., priorities and perception must change. The way we see the world must be reshaped. The only way I see this occurring is from rhetoric (talking about this issue), education and examples from the top. By the top I mean people that have visibility and those that are influencers. I do not see the modern family or the Protestant work ethic that Max Weber wrote about in the early 1900’s coming to the rescue. The former has disintegrated compared to what it once was and the latter has been largely filtered out of society over the last four generations.

For me to realize that we might be at a point where society must rely on politicians, movie stars, sports heroes and reality TV to encourage society to save its money is enough to make me want to move to the dark side of the moon.

I’m linking below to a Barron’s article that provides four stocks that have sold-off recently and why you should consider purchasing them. In a bull market sometimes it’s difficult for investors to identify stocks that are ‘discounted’. This article attempts to do just that. Where do you find opportunity in a market that has run for quite an extended period of time? It’s a good question and a difficult question to answer. Leave it to Barron’s to tackle this one…

In the latest sign Americans are increasingly comfortable taking on more debt, auto buyers borrowed a record amount in the first quarter with the average monthly payment climbing to an all-time high of $474.

Not only that, buyers also continued to spread payments out over a longer period of time, with 24.8 percent of auto loans now coming with payment terms between six and seven years according to a new report from Experian Automotive.

Last week I had the opportunity with my girlfriend to be propositioned for a timeshare purchase. If you’re not familiar, in areas where tourism thrives, a number of solicitors will be stationed in shops or hotel lobbies with pitches on how you can get X gift if you listen to a 90 minute ‘talk’ about their vacation offer. In the case of my girlfriend and I, we were offered a $100 Visa gift card for attending. The location for us was Tahoe (south shore) and the property was a former Embassy Suites resort that Diamond Resorts International had recently purchased. The property is under renovation and will be completely finished in a couple months (August).

In short, the 90 minute presentation was actually 4 hours and 45 minutes (285 minutes). The initial sales person offered us about 4 different sales packages. None of these interested us. I told them that through sites like VRBO and Hotwire I could find vacation rentals and hotel rooms at comparable rates or lower rates. They didn’t take my rational too well and more or less scoffed at the thought. That’s fine, their job is to sell a product, so they need to stand behind it.

After I told them no, then a much more pleasant sales person came over did some closing paper work and threw out one last offer. The offer wasn’t for a timeshare purchase. It was for a 18-month introductory sampler package. The package included a much larger number of points than what was previously discussed and the points were at a much lower cost per point, too. The catch was that it was limited in terms of time (18 months) and the properties you have access to. The selection of properties, given our travel desires in the next 18 months was actually pretty good.

We initially signed on for the deal (We have since canceled…see below for more information). Afterwards I did some comparison shopping to see if I could beat the package and, if I could, by how much. Below are a few tables that illustrate the original offer with the places we thought we’d visit and how the cost measured up with my comparison shopping using Hotwire and VRBO.

The ‘Sampler Package” deal.

Diamond Resort Travel Breakdown

Note – As you see, the total point amount to pull off the travel arrangement goes over the 15,000 by 500 points. For sake of this analysis, I’m going to assume the total of $2,795 stays as is and 15,000 would suffice.

Hotwire.com Travel Breakdown

Vacation Rental By Owner (VRBO.com) Analysis

Comparison Analysis

In the end, when you put Diamond’s promotional sampler package up against competitive travel sources they cannot compete. The power of communication (the Internet) has opened up avenues that simply did not exist before in terms of hotels and especially vacation property rentals. As you can see from above, a little bit of shopping around can easily shave off upwards of 30% from what Diamond had to offer. (I did the comparison in less than 1 hour.)

In terms of cancellation, the policy included a 7 day period in which you can receive a full refund if you either mail or fax a cancellation request to the company.

On a final note, if you are ever in the market for buying a timeshare, please consider the future value of your money that you’re going to put down for the ‘share’. The lowest offer we received was $11,000 to buy in. If you took that $11,000 and assumed you were to earn an average of 8% annually for the next 30 years, you would end up with nearly $110,700. That’s your opportunity cost! That alone should make you pause. Then add the fact that you’re paying an annual maintenance fee per year.

What I’ve said above isn’t an indictment against timeshares. It’s just a few points to consider, if you’re ever presented with a sales pitch that is focused on grabbing a serious chunk of cash out of your wallet.

For the record, we ended up getting $150, not $100, for our time listening to their sales talk. For the amount of time spent, we should have received more like $300.

If you track the market using Investors Business Daily’s market measurements, today the market entered into a correction. Their measurement doesn’t look at the general rule of thumb of a correction being around a 10% decline in the broader market, but we can all agree that the market hasn’t been so hot for the last few weeks. So, you’re an investor; what do you do?

A number of people are going to go into a panic. It happens and it’s actually probably a pretty natural reaction. Are you going to do that? I’d hope not. It’s not that selling in the face of a market correction is a bad thing. It actually can be quite beneficial, if you have some type of rule and/or strategy behind what you’re doing. Just dumping your entire basket of stocks because of some inhospitable weather the market is probably not the best idea.

If you’ve recently entered into a position on the basis of the stock breaking out into new territory, you might want to think twice about your position. Was this a short-term trade? If yes, then it might be a reasonable move to get out of the stock. It’s a calculated risk, but knowing the market is trending down and your investment thesis was a short-term upward swing has to lead you to see that your view is in opposition to the current trend.

If you’re in say a dividend yielding stock that’s certainly a long-term hold, then why let a correction shake you out of your position? It’s not a matter of weeks or a few months that will define your investment, but a matter of years. Keep that perspective if you’re hit with a few dicey days.

Above all else, don’t let sudden fear overwhelm you and bring you to do something not so wise. Think about why you’re in a position. If you’re in it for a short-term play that was built on a hot market running up in price, then re-evaluate based on thing change in market climate. Whatever the base assumptions were and how they mesh with the situation that is should lead your decision making process. Don’t let the fear mongers that are everywhere drive you into selling because the world is on the edge of economically collapsing or some other doom and gloom scenario.